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Emerging assets fall second day on Brexit concern

Singapore - Emerging-market shares and currencies dropped for a second day on concern Britain’s decision to exit the European Union will sap global economic growth.

Stocks in the Czech Republic, Poland, Malaysia and Taiwan all dropped on Monday, picking up where they left off on Friday when a gauge of developing-nation equities tumbled the most in 10 months following the UK referendum.

The Polish zloty and Czech koruna led declines in emerging-market currencies. China weakened its fixing for the yuan by the most since August after the dollar rallied last week. Franklin Templeton bond fund manager Michael Hasenstab said emerging markets will recover.

“The dark cloud of Brexit will continue to hang over emerging-market sentiment for some time,” Jason Daw, head of emerging-market foreign-exchange strategy at Societe Generale in Singapore, wrote in a note to clients. “Risk premium should increase, associated with greater perceived chances of broader European disintegration and slower growth in the UK and Europe.”

The UK decision to exit the EU sent shock waves across global financial markets that had rallied before the vote on predictions for a victory to the “Remain” side. A struggle within the Conservative Party to replace Prime Minister David Cameron is under way with some members of parliament moving to block pro-Brexit lawmaker Boris Johnson from the position. Labour Party leader Jeremy Corbyn is also facing a revolt.

The MSCI Emerging Markets Index of shares dropped 0.3% as of 09:43 after dropping as much as 1.1%. Seven of the 10 industry groups declined, led by technology and banking stocks. It tumbled 3.5% on Friday, the most since August.

Benchmark share indexes fell 0.9% in the Czech Republic, 0.4% in Poland and 0.2% in both Malaysia and Taiwan. China’s Shanghai Composite Index gained 1.5% after dropping 1.3% on Friday.

Tencent was the biggest drag on the MSCI Emerging Market Index, falling 1.5%, followed by NAVER, which retreated 3.9%, and Infsys, which slipped 1.9%.

For some investors, the slide in emerging-market shares presents an opportunity given the Brexit decision makes it less likely the US will raise interest rates this year.

“For me this creates a buying opportunity, and in the medium term things are looking good for the emerging markets, especially if the Federal Reserves decided to delay the rate increase,” said Jemmy Paul, investment director at PT Sucorinvest Asset Management in Jakarta.

Currencies

An index of emerging-market currencies fell 0.3% after dropping 1.3% on Friday. A measure of historical volatility over the past 100 days surged to the highest level since March 2012.

The zloty weakened 0.8%, the koruna dropped 0.7% and the Hungarian forint depreciated 0.6%.

Malaysia’s ringgit slumped to a three-week low as a decline in crude oil worsened the outlook for its exports. The currency slumped as much as 1.8% to 4.1663 per dollar, the weakest since June 2.

The People’s Bank of China lowered the reference rate for the yuan by 0.9% to 6.6375 per dollar after the greenback surged on Friday. The fixing - from which the spot rate can diverge a maximum 2% - is set using the previous day’s onshore close, overnight moves in major currencies, as well as market demand and supply.

Bonds

Hasenstab, who manages the $48bn US-incorporated Templeton Global Bond Fund, said the company is looking to take advantage of some market "dislocations” after the UK Brexit vote.

“Once people begin to distill what really matters surrounding the outcome of this event for Europe and the rest of the world, I think that some of those risk assets in emerging markets that sold off will begin to recover,” he wrote in a commentary. The Global Bond Fund’s main shareholdings are in Mexico, Brazil and South Korea.

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